CALDERWOOD & HARKNESS LLP Attorneys at Law
600 Renaissance Center, Suite 3200
Bernard Crawford Partner — Technology Transactions & Commercial Litigation Direct Dial: (313) 552-8147
Email: bcrawford@calderwoodharkness.com
October 6, 2023
Via Email (abriscoe@redstonewhitaker.com) and Overnight Courier
Alan M. Briscoe, Esq. Redstone Whitaker LLP 555 Mission Street, Suite 2800 San Francisco, CA 94105
Re: Master Embedded Software License and Services Agreement, dated June 21, 2022, between Vantage Mobility Systems Corp. and Meridian Code Technologies, Inc. — Response to Year 2 Maintenance & Support Fee Invoice Demand (Invoice No. MC-INV-2023-0701, dated July 1, 2023, in the amount of $2,400,000.00); Response to Redstone Whitaker LLP Demand Letter dated September 1, 2023
Dear Mr. Briscoe:
This firm represents Vantage Mobility Systems Corp. ("VMS"), a Delaware corporation with its principal place of business at 4100 Industrial Parkway, Sterling Heights, Michigan 48312, in connection with the above-referenced matter, Calderwood & Harkness LLP Matter No. 1007-00008. I write in response to your letter dated September 1, 2023, sent on behalf of your client, Meridian Code Technologies, Inc. ("MeridianCode"), in which you demand that VMS remit payment of the Year 2 Annual Maintenance & Support Fee in the amount of Two Million Four Hundred Thousand Dollars ($2,400,000.00) as invoiced by MeridianCode on July 1, 2023 (Invoice No. MC-INV-2023-0701), and assert that VMS's failure to tender such payment within thirty (30) days of your letter would constitute a material breach of the Master Embedded Software License and Services Agreement dated June 21, 2022 (the "MESLSA" or "Agreement").
VMS disputes MeridianCode's demand and the characterization of VMS's position set forth in your September 1, 2023 letter. As detailed below, VMS has substantial legal and contractual bases for its position that the full Year 2 Maintenance & Support Fee is not owed under the circumstances that presently govern the parties' relationship — specifically, the invocation and acknowledgment of Dormancy Status under Section 9.4 of the MESLSA, which materially reduced MeridianCode's support obligations to a critical-security-patch-only level. VMS expressly reserves all rights and remedies available to it under the MESLSA and applicable law, including without limitation those identified in the Reservation of Rights section below. This letter supplements, and does not supersede or replace, our initial position letter dated August 18, 2023, regarding the dormancy determination and the fee dispute, a copy of which remains in your possession.
I. Background and Procedural History
The parties executed the MESLSA on June 21, 2022. The Agreement carries a total deal value of approximately Twenty Million Dollars ($20,000,000.00) and governs MeridianCode's license to VMS of the ATLAS-RT™ embedded real-time operating system, Version 4.2 (subsequently updated to Version 4.2.3), together with associated integration services, maintenance, and technical support. The ATLAS-RT™ software was licensed for integration into VMS's Project Argonaut advanced vehicle platform program, which at the time of execution encompassed five distinct vehicle platforms designated Argonaut-A through Argonaut-E.
The fee structure established under the MESLSA and its Exhibit B (Fee Schedule and Payment Milestones) includes the following components relevant to the present dispute:
• Upfront License Fee: $8,000,000.00, paid in full on June 21, 2022, concurrent with execution of the MESLSA.
• Year 1 Annual Maintenance & Support Fee: $2,400,000.00, invoiced and paid in full on July 15, 2022.
• Integration Services Fees (Milestones 1–3): $1,920,000.00, paid upon completion and acceptance of Milestones 1, 2, and 3 during the period from August 2022 through February 2023.
• Year 2 Annual Maintenance & Support Fee: $2,400,000.00, invoiced by MeridianCode on July 1, 2023 — the fee at issue in this dispute.
• Integration Services Fees (Milestones 4–5): $1,280,000.00, not yet invoiced and not yet due, as Milestones 4 and 5 remain uncompleted due to the suspension of integration work.
To date, VMS has paid a total of Twelve Million Three Hundred Twenty Thousand Dollars ($12,320,000.00) under the MESLSA, comprising the $8,000,000.00 upfront license fee, the $2,400,000.00 Year 1 maintenance fee, and $1,920,000.00 in integration services fees for Milestones 1 through 3. VMS has performed its payment obligations fully and in a timely manner with respect to all amounts that have become due and payable under the Agreement prior to the dispute that is the subject of this correspondence.
Subsequent to execution of the MESLSA, VMS's Board of Directors adopted a resolution dated March 14, 2023 (the "Rescoping Resolution"), which reduced the scope of Project Argonaut from five vehicle platforms (Argonaut-A through Argonaut-E) to two platforms (Argonaut-A and Argonaut-C). The Rescoping Resolution further deferred electrification integration work that had been contemplated for the Argonaut-B, Argonaut-D, and Argonaut-E platforms indefinitely. This strategic decision was driven by well-documented shifts in market conditions and VMS's internal capital allocation priorities, as communicated to MeridianCode's integration team leads, including Gregory L. Fisk (MeridianCode's Senior Integration Architect) and Diana Cho (MeridianCode's Project Manager for the Argonaut engagement), during regular project status meetings held in March 2023.
As a direct consequence of the Rescoping Resolution, VMS suspended all integration work related to the ATLAS-RT™ software as of March 22, 2023. From that date forward, no integration activities, testing, compatibility assessments, or active development work under the MESLSA were performed by either party. The integration environment established for the Argonaut program was placed in a maintenance-only configuration, and VMS's engineering team was reassigned to other corporate priorities.
On July 14, 2023 — six days before the 120-day dormancy trigger date of July 20, 2023, calculated from the March 22, 2023 suspension date — VMS provided MeridianCode with formal written notice of Dormancy Status invocation pursuant to Section 9.4 of the MESLSA. This notice was delivered via both email to the designated notice addresses and overnight courier to MeridianCode's principal office in San Jose, California, in accordance with the notice provisions of Section 14.2 of the Agreement. The dormancy notice was timely, as it was delivered within the 120-day period established by the Agreement for invocation of Dormancy Status following a cessation of active integration activities.
MeridianCode acknowledged receipt of the dormancy notice and confirmed the entry of the Agreement into Dormancy Status by letter dated August 3, 2023, signed by MeridianCode's Vice President of Enterprise Licensing, Yolanda S. Trimble. That acknowledgment letter expressly stated that MeridianCode recognized the Agreement's transition to Dormancy Status effective as of that date and confirmed that MeridianCode's support obligations would be adjusted in accordance with Section 9.4 of the MESLSA.
It is critical to note the chronological relationship between the disputed invoice and the dormancy events. The Year 2 Maintenance & Support Fee invoice (Invoice No. MC-INV-2023-0701) was issued on July 1, 2023 — a date that falls squarely within the period between the suspension of all integration work (March 22, 2023) and the formal invocation of Dormancy Status (July 14, 2023). At the time of invoicing, integration activities had been inactive for over one hundred (100) days. While MeridianCode's formal acknowledgment of Dormancy Status came on August 3, 2023, the operative facts giving rise to dormancy — namely, the complete cessation of integration work and the rescoping of the Argonaut program — were well known to MeridianCode's personnel months before the invoice was generated.
II. VMS's Position — The Year 2 Maintenance Fee Is Not Owed in Full During Dormancy
A. Section 9.4 Reduces Support Obligations During Dormancy, Necessitating a Corresponding Reduction in the Maintenance Fee
Section 9.4 of the MESLSA governs the rights and obligations of the parties upon entry into Dormancy Status. That section provides, in pertinent part:
"Upon entry into Dormancy Status, Licensor's maintenance and support obligations under this Agreement shall be reduced to the provision of critical security patches only. During Dormancy Status, Licensor shall have no obligation to provide routine software updates, bug fixes, technical support, compatibility testing, integration assistance, or any other maintenance or support services except as expressly set forth in this Section 9.4."
The import of this provision is plain. The full suite of maintenance and support services for which the $2,400,000.00 annual fee was negotiated includes, among other obligations: (i) routine software updates and enhancements; (ii) bug identification and remediation; (iii) dedicated technical support and engineering resources; (iv) compatibility testing across the licensed vehicle platforms; and (v) integration assistance for ongoing Argonaut development activities. These services, taken together, constitute the core of MeridianCode's performance obligations under the maintenance and support provisions of the MESLSA and form the essential consideration for which the annual maintenance fee was established.
Dormancy Status, by MeridianCode's own acknowledgment dated August 3, 2023, reduces these comprehensive obligations to the bare minimum: critical security patches only. MeridianCode is no longer required to — and in fact is not — providing routine updates, bug fixes, dedicated technical support, compatibility testing, or integration assistance. The overwhelming majority of the services that comprise the maintenance and support package have been suspended by operation of Section 9.4.
The $2,400,000.00 annual maintenance fee was negotiated and set at the time of the MESLSA's execution in contemplation of the full scope of maintenance and support services to be provided across active integration on up to five vehicle platforms. That fee was calibrated to the substantial resources MeridianCode would be required to dedicate to the Argonaut program, including dedicated engineering personnel, testing infrastructure, and priority support capacity. The parties did not contemplate — and VMS did not agree to — a scenario in which VMS would pay the full annual fee while receiving only a nominal fraction of the contracted services.
It would be commercially unreasonable and fundamentally inconsistent with the structure and intent of the MESLSA for MeridianCode to demand the full annual maintenance fee while simultaneously providing only critical security patches. VMS is not receiving — and under dormancy, cannot receive — the consideration for which the $2,400,000.00 fee was established. The dramatic reduction in MeridianCode's performance obligations under Section 9.4 must be accompanied by a commensurate reduction in VMS's payment obligations; any contrary reading would produce an absurd and inequitable result wholly disconnected from the bargained-for exchange that lies at the heart of the Agreement.
B. The Implied Covenant of Good Faith and Fair Dealing Precludes MeridianCode's Demand
Under Michigan law, which governs the MESLSA pursuant to Section 14.8 (Choice of Law), there is an implied covenant of good faith and fair dealing in every contract. See Burkhardt v. Bailey, 260 Mich. App. 636, 656 (2004); Fodale v. Waste Mgmt. of Mich., Inc., 271 Mich. App. 11, 35 (2006). This covenant prohibits a party from taking actions that, while not expressly prohibited by the contract, have the effect of destroying the right of the other party to receive the fruits of the agreement. See Gen. Aviation, Inc. v. Cessna Aircraft Co., 915 F.2d 1038, 1042 (6th Cir. 1990) (applying Michigan law).
MeridianCode's demand for full payment of the Year 2 Maintenance & Support Fee while simultaneously acknowledging its own dramatically reduced obligations during Dormancy Status is inconsistent with this implied obligation. MeridianCode cannot, in good faith, invoke the dormancy provisions of Section 9.4 that relieve it of the vast majority of its support obligations and, in the same breath, demand full compensation as though those obligations remained fully intact. Such conduct would allow MeridianCode to retain the economic benefit of dormancy — reduced resource commitments, reduced operational costs, and freedom from comprehensive support responsibilities — while simultaneously extracting from VMS the full economic consideration that was bargained for only in exchange for comprehensive support services.
The implied covenant requires that MeridianCode's exercise of its rights under the Agreement be conducted in a manner consistent with the reasonable expectations of the parties at the time of contracting. Those expectations plainly included a correlation between the level of services provided and the fees charged. MeridianCode's attempt to sever the fee from the services it compensates violates those expectations and breaches the implied covenant of good faith and fair dealing.
C. The Absence of Express Fee Provisions During Dormancy Constitutes an Ambiguity Favoring VMS
Section 9.4 of the MESLSA is silent on the question of whether the annual maintenance fee continues at full rate, is prorated, or is suspended during Dormancy Status. The provision addresses the reduction in service obligations with specificity but does not include any corresponding provision regarding the maintenance fee. This omission is significant.
Under well-established Michigan contract interpretation principles, where a contract provision is ambiguous or silent on a material term, the ambiguity is construed against the drafter. See Klapp v. United Ins. Grp. Agency, Inc., 468 Mich. 459, 470 (2003); Rory v. Continental Ins. Co., 473 Mich. 457, 469 (2005). It is undisputed that MeridianCode prepared the initial draft of the MESLSA and that the dormancy provisions, including Section 9.4, were drafted by MeridianCode's counsel. To the extent the omission of any express provision requiring continued full maintenance fee payment during dormancy creates an ambiguity — and VMS submits that it plainly does — that ambiguity must be resolved against MeridianCode as the drafter.
The silence of Section 9.4 on the fee question, read in conjunction with the express and substantial reduction in MeridianCode's support obligations during dormancy, supports VMS's position that the annual maintenance fee should be, at a minimum, prorated or abated to reflect the reduced scope of services actually being provided. Had MeridianCode intended to preserve its right to the full maintenance fee regardless of dormancy, it could have — and should have — included an express provision to that effect. Its failure to do so must be given legal consequence.
D. Failure of Consideration
To the extent MeridianCode contends that the full $2,400,000.00 Year 2 Maintenance & Support Fee is owed regardless of dormancy and without any adjustment for the reduction in services, VMS asserts a defense of failure of consideration. The essence of the maintenance and support relationship under the MESLSA is the provision of comprehensive support services in exchange for the annual fee. That relationship is symbiotic and mutually dependent: VMS pays the fee because it receives the services, and MeridianCode provides the services because it receives the fee.
Dormancy Status eliminates the substantive performance that forms the basis of the annual maintenance fee. When MeridianCode's obligations are reduced to critical security patches only — a service level that requires a fraction of the resources, personnel, and infrastructure contemplated by the full maintenance and support package — the consideration supporting the $2,400,000.00 fee has substantially failed. VMS is entitled to withhold payment commensurate with the reduction in services actually provided, and to the extent VMS has already tendered any amounts in excess of the fair value of dormancy-level services, VMS reserves the right to seek recovery of such overpayment.
Michigan courts have long recognized that a party may assert failure of consideration as a defense to a claim for payment where the counterparty has failed to perform the obligations that formed the basis of the payment obligation. See Huhtala v. Kestrel Indemnity Co. Ins. Co., 401 Mich. 118, 132 (1977). The failure need not be total; a partial failure of consideration proportionate to the reduction in performance is sufficient to support a proportionate reduction in the payment obligation. VMS's position is squarely supported by these principles.
III. VMS's Proposal — Prorated Payment or Fee Credit
VMS is committed to resolving this dispute in a commercially reasonable manner that preserves the parties' relationship and reflects the economic realities of Dormancy Status. To that end, VMS offers the following alternative proposals for MeridianCode's consideration.
A. Option 1 — Prorated Payment During Dormancy
VMS proposes that the Year 2 Annual Maintenance & Support Fee be prorated to reflect the reduced scope of services provided by MeridianCode during Dormancy Status. Specifically, VMS proposes that the fee be calculated on the basis of the critical-security-patch-only support level established by Section 9.4, which VMS estimates to represent no more than fifteen to twenty percent (15–20%) of the value of full maintenance and support services under the MESLSA.
This estimate is grounded in a reasonable assessment of the resources required to provide critical security patches as compared to the full suite of maintenance and support services. The full maintenance package encompasses dedicated engineering teams, 24/7 technical support availability, regular update cycles, compatibility testing across multiple vehicle platforms, and active integration assistance — none of which are required or provided during dormancy. Critical security patch support, by contrast, is a reactive, limited-scope obligation that requires only periodic monitoring and ad hoc patch development and deployment.
Under this prorated approach, VMS would pay between Three Hundred Sixty Thousand Dollars ($360,000.00) and Four Hundred Eighty Thousand Dollars ($480,000.00) (representing 15–20% of $2,400,000.00) for the Year 2 maintenance period during which Dormancy Status is in effect, with the balance credited or waived. VMS is prepared to discuss the appropriate proration methodology in good faith, including the possibility of engaging an independent technical consultant to assess the relative resource requirements of critical-security-patch-only support versus full maintenance and support services.
B. Option 2 — Fee Credit Against Future Obligations
Alternatively, VMS proposes that, should MeridianCode insist on invoicing the full $2,400,000.00 Year 2 Maintenance & Support Fee and should payment of that full amount be tendered by VMS (under protest and with full reservation of rights), the amount paid be credited against future obligations under the MESLSA. Specifically, VMS proposes that the excess amount — calculated as the difference between the full $2,400,000.00 fee and the fair value of critical-security-patch-only support during dormancy — be credited against:
(a) Future integration services fees for Milestones 4 and 5, which total $1,280,000.00 and which would become payable upon reactivation of integration activities; and/or
(b) Future annual maintenance fees that would become due upon reactivation of the MESLSA from Dormancy Status and the resumption of full maintenance and support services.
This credit approach preserves MeridianCode's near-term cash flow while recognizing the fundamental inequity of requiring VMS to bear the full cost of services it is not receiving. VMS notes that this approach aligns with the parties' mutual interest in preserving the commercial relationship and maintaining optionality for reactivation of Project Argonaut on the Argonaut-A and Argonaut-C platforms. Both parties have invested substantial resources in the Argonaut engagement, and a commercially reasonable resolution of the fee dispute would facilitate future collaboration rather than entrench adversarial positions.
IV. Rebuttal of MeridianCode's Anticipated Arguments
A. The Invoice Was Issued Before Dormancy Was Formally Invoked
VMS acknowledges that the July 1, 2023 invoice predates the July 14, 2023 dormancy notice and the July 20, 2023 trigger date under Section 9.4. MeridianCode may contend that because the invoice was issued prior to the formal invocation of dormancy, the full fee had already accrued and become payable without regard to subsequent events. This argument fails for several reasons.
First, and most fundamentally, integration work had been suspended since March 22, 2023 — more than three months before the invoice date. The practical conditions giving rise to dormancy were fully in effect at the time the invoice was generated. The formal invocation of dormancy was a procedural step confirming a state of affairs that had existed for over one hundred days.
Second, MeridianCode was fully aware of the suspension and the rescoping of Project Argonaut well before it issued the Year 2 invoice. Gregory L. Fisk and Diana Cho — MeridianCode's own integration team leads — were informed by VMS personnel during regular project status meetings in March 2023 of the Board's decision to rescope the Argonaut program and suspend integration activities. MeridianCode's decision to issue the invoice on July 1, 2023, without acknowledging or accounting for the months-long suspension of activities, cannot be used to circumvent the dormancy provisions of the Agreement.
Third, the dormancy notice was timely sent before the 120-day trigger date, and Dormancy Status was acknowledged by MeridianCode effective August 3, 2023. The Year 2 maintenance period runs from approximately July 2023 through June 2024 — a twelve-month period of which the vast majority will occur during Dormancy Status. It would be inequitable and commercially unreasonable to require VMS to remit full payment for a full year of comprehensive maintenance and support services when dormancy was invoked within weeks of the invoice date and will govern the overwhelming majority of the service period.
Fourth, nothing in the MESLSA provides that an invoice, once issued, creates an irrevocable payment obligation immune from adjustment based on subsequent changes in the scope of services to be provided. The invoice is a billing instrument, not a contractual modification. The parties' rights and obligations are governed by the MESLSA itself, including its dormancy provisions, not by the unilateral issuance of an invoice.
B. The Fee Schedule Does Not Condition Payment on Service Levels
MeridianCode may argue that Exhibit B (Fee Schedule and Payment Milestones) to the MESLSA establishes a fixed annual maintenance fee of $2,400,000.00 without reference to service levels, and that the fee is therefore payable in full regardless of whether MeridianCode's service obligations have been reduced by dormancy. This argument is without merit.
Exhibit B must be read in conjunction with the operative provisions of the MESLSA, including Section 9.4, which expressly modifies the nature and scope of MeridianCode's obligations during Dormancy Status. It is a fundamental principle of contract interpretation that an exhibit or schedule to an agreement does not stand alone as an independent obligation divorced from the body of the agreement to which it is appended. See DaimlerChrysler Corp. v. Wesco Distrib., Inc., 281 Mich. App. 240, 248 (2008) (holding that a contract must be read as a whole, giving effect to all provisions). The Fee Schedule in Exhibit B is a pricing term that establishes compensation for defined performance obligations set forth in the body of the MESLSA. When those performance obligations are materially modified by the express terms of the Agreement — as they are by Section 9.4 during dormancy — the pricing terms must be interpreted in light of the modified obligations.
A fee schedule is not a mechanism by which one party may secure the economic benefit of reduced performance while the other party remains obligated to pay as though full performance were being rendered. To adopt MeridianCode's reading would be to convert the annual maintenance fee from compensation for services into an unconditional revenue guarantee — an interpretation that finds no support in the text of the MESLSA and that would produce an absurd and commercially unreasonable result.
V. Reservation of Rights
VMS expressly reserves all rights and remedies available to it under the MESLSA, at law, and in equity, including without limitation:
(a) The right to dispute any claimed breach by MeridianCode arising from VMS's non-payment or partial payment of the Year 2 Maintenance & Support Fee, and to assert all available defenses, including but not limited to failure of consideration, breach of the implied covenant of good faith and fair dealing, commercial impracticability, and frustration of purpose;
(b) The right to seek recovery or credit of amounts previously paid under the MESLSA, including the $12,320,000.00 in total fees paid to date, to the extent that such recovery or credit is warranted by the circumstances, including any determination that VMS has overpaid for services not received or not rendered in accordance with the Agreement;
(c) The right to invoke binding arbitration under the rules of the Midwest Arbitration Institute, seated in Detroit, Michigan, with a three-arbitrator panel for disputes exceeding $1,000,000.00, as provided in Section 14.6 of the MESLSA;
(d) All rights under Section 9.4 (Dormancy), Section 9.1 (Termination for Convenience), Section 9.2 (Termination for Cause), and all other provisions of the MESLSA;
(e) All rights related to derivative works designated DW-001, DW-002, and DW-003, which are the subject of separate correspondence between the parties and which VMS does not address in this letter; and
(f) All other rights, remedies, claims, counterclaims, and defenses available under Michigan law or otherwise, whether known or unknown, that VMS may have in connection with this dispute or the MESLSA generally.
Nothing in this letter shall be construed as a waiver, modification, or amendment of VMS's rights under the MESLSA or applicable law. No statement, proposal, or discussion contained herein shall constitute an admission of liability, an acknowledgment of any obligation, or a concession with respect to any legal or factual position. VMS reserves the right to raise additional arguments, defenses, and claims not set forth in this letter, and the omission of any argument or defense from this correspondence shall not be deemed a waiver thereof.
VI. Request for Response and Proposed Next Steps
VMS requests that MeridianCode, through Redstone Whitaker LLP, respond to this letter within thirty (30) days of the date hereof — that is, on or before November 6, 2023 — with MeridianCode's position on the proposals set forth in Section III above and any counterproposal MeridianCode may wish to advance.
VMS's strong preference is for a negotiated resolution of the Year 2 Maintenance Fee dispute, consistent with the parties' broader and ongoing discussions regarding a potential dormancy extension, fee restructuring, and the future of the Argonaut-A and Argonaut-C platform integration. To that end, VMS remains open to a meeting or telephonic conference between counsel — specifically, myself and my colleague Gabrielle Moss of Calderwood & Harkness, and you and your colleague Natasha C. Ferraro of Redstone Whitaker — to discuss VMS's proposals in further detail and explore the parameters of a mutually acceptable resolution.
VMS notes that the twelve-month dormancy cap under Section 9.4 of the MESLSA expires on August 3, 2024, and that timely resolution of this fee dispute is integral to the broader negotiation framework concerning the parties' ongoing relationship. The dormancy cap expiration will require the parties to determine whether integration activities will be reactivated, the dormancy period extended (if permitted by the Agreement or by mutual written amendment), or the Agreement terminated. The resolution of the Year 2 fee dispute will materially affect the economic calculus underlying each of these options, and it is therefore in both parties' interest to address this matter promptly and constructively.
VMS reiterates, however, that its willingness to engage in good-faith discussions and to propose constructive alternatives to litigation or arbitration should not be mistaken for acceptance of MeridianCode's position regarding the full Year 2 Maintenance & Support Fee obligation. VMS firmly maintains that the full $2,400,000.00 fee is not owed under the circumstances, and VMS will assert its contractual and legal rights vigorously in any forum should a negotiated resolution prove unattainable.
Sincerely,
CALDERWOOD & HARKNESS LLP
By: ________
Bernard Crawford Partner Direct Dial: (313) 552-8147
Email: bcrawford@calderwoodharkness.com
cc: Martin G. Cross, General Counsel, Vantage Mobility Systems Corp. (via email and overnight courier)
cc: Sandra M. Okafor, Chief Financial Officer, Vantage Mobility Systems Corp. (via email)
cc: Gabrielle Moss, Calderwood & Harkness LLP (via email)
cc: Conrad Ashby, Calderwood & Harkness LLP (via email)
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